I confess that I've never quite gotten all the enthusiasm over the Khan Academy. For those of you who have never heard of it, it's the brainchild of Salman Khan, an MIT graduate who started tutoring a cousin in math over the internet a few years ago. He eventually started recording the sessions and turned them into a vast library of short videos explaining various concepts in math and science. Later he branched out into other subjects, some done by other lecturers, and now has a collection of over 2,700 instructional videos at http://www.khanacademy.org.

I've dipped into the videos from time to time, and truthfully, they've always seemed perfectly competent but not really all that special. On the other hand, they do cover a lot of ground; Khan has a nice, engaging speaking style; and students can watch videos over and over if they're having trouble. But it turns out there's more to it. Via Tyler Cowen, here's a piece in Inside Higher Ed about what the Khan Academy does behind the scenes:

“I think too much conversation about Khan Academy is about cute little videos," Khan said in an interview last week. “Most of our resources, almost two-thirds of [the staff], are engineers working on the exercises and analytics platform. That, I think, is what we’re most excited about.”

....Using math and computer science concepts decidedly more advanced than most of those in Khan’s video library, the Khan engineers have trained the website’s exercise platform how to predict, with startling accuracy, how likely it is that a student will correctly answer the next practice problem — and whether that student will be able to solve the same type of problem a week, two weeks, and a month later.

They do this by accounting for hundreds of data points that describe, in numbers, the entire history of the relationship between a learner and a concept. “If [a user is] logged in, then we have the entire history of every problem they’ve done, and how long it took them, and how they did,” says Ben Kamens, the lead developer at Khan Academy. “So whenever anybody does a problem, we see whether they got it right or wrong, how many tries it took them, what their guess was, what the problem was, how many hints they used, and how long they took between each hint.”

The Khan engineers are also working to tweak the exercise platform so it does not confuse genuine mastery with “pattern matching” — a method of problem-solving wherein a student mechanically rehashes the steps necessary to solve that type of problem without necessarily grasping, conceptually, what those steps represent.

Interesting! Maybe all those out-of-work Wall Street rocket scientists are finally using their skills for something socially useful. There's more at the link.

Matt Yglesias is annoyed at President Obama for repeatedly saying that the rise of ATM machines has reduced the number of bank tellers. In fact, the number of bank tellers and the number of ATMs has gone up over the past decade. In 1999 American banks employed 1.62 tellers per 1000 people, and by the peak pre-recession year of 2007 that had gone up to 2.02 per 1000.

So Obama is wrong about this. But what I'm really curious about is something else: What are all these tellers doing? It's easy for me to believe that ATMs didn't reduce our need for tellers, but instead simply increased the number of banking transactions we engage in. Instead of carefully figuring out how much money we need every week or two, we just go to the ATM whenever we run low. So instead of two or three withdrawals a month, we all now pull money out of the bank two or three times a week. The effect on tellers might be pretty small.

But even if that's true (and I'm just guessing), why do we need more tellers? What are they all doing? My local bank is just a single data point, but one possibility is: nothing. Thirty years ago, when I went to the bank to do something, I had to wait in line. Not anymore! My Wells Fargo branch always has three or four tellers available, and the modal number of people waiting in line is zero. Most of the time, you just walk up to a teller and do your business.

This is great for me, of course, but frankly doesn't seem like a profit-maximizing strategy for Wells Fargo. Do I have any bank manager readers who can provide some insight into this? Is my branch unusual? Are tellers busy with other work when they aren't helping customers? Has the average teller transaction gotten more complex over the past decade? What's the story here?

One of the criticisms of Obamacare is that it gives employers a big incentive to drop healthcare coverage. Sure, they'd have to pay a fine, but they'd still save a bundle of money and it's not like they'd have to worry about their workers going completely without insurance. Employees would just go onto the exchanges and buy subsidized plans there. Sarah Kliff met with Lockton, a Kansas City-based company that consults with mid-sized companies on health insurance benefits, to put some numbers to this:

For the employer, dropping coverage is a pretty decent deal: A company would see its health care costs reduced by over 40 percent. They don’t drop to zero, however, since the employer would still be on the hook for the fines that come along with not offering coverage.

But for the employee, it’s a pretty lousy deal. Lockton ran the numbers, using data on how much employers pay for health insurance now and how much health insurance on the exchanges is projected to cost.They found that employers foot a significantly larger chunk of the insurance bill than the federal government would, even with the new subsidies they’d receive. The firm predicts their premiums would increase anywhere from 79 to 125 percent if they lose employer coverage and have to go to the exchange. There’s such a big variation because exchange subsidies vary by income: Those who earn more are eligible for a larger subsidy.

Here's my question about this — and it's a genuine question since I don't understand the dynamics here too well. It's fairly common in big companies for executives to have a better healthcare plan than rank-and-file employees. But that's usually limited to just the very top execs. At the level of director and below, everyone is on the same plan, and that's because health insurance providers aren't willing to let companies pick and choose who's on the group plan. It's all or nothing. So one of the things that will prevent companies from dropping coverage is that they'd have to drop it for everyone, and that would cause so much uproar in the managerial ranks that they couldn't get away with it.

There are a couple of reasons why this might not be a big deal:

  • Health insurers, in fact, might be happy to provide policies that cover supervisory personnel and no one else.
  • Or maybe they wouldn't, but it wouldn't be that big a deal. Companies would shunt everyone onto the exchanges, but give managers an annual bonus of some kind that would cover (say) 85% of the cost of a gold level plan. Everyone else would have to make do with whatever they could afford through the exchange.

So much of this depends on behavioral predictions that I imagine that there's really no way to know for sure how it's going to play out. But if employers do decide to start dropping health coverage en masse, what will that mean? Is it genuinely a bad thing? Or would it be a good deal in the long run, increasing pressure on Congress to hasten the day when we have genuine universal coverage in America? It's a good question.

Senator Mark Kirk explains his opposition to extending the payroll tax cut that was originally passed last year:

The White House has redefined this as the payroll tax deduction. It's not the payroll tax deduction — it's contributions to Social Security. And when the American people hear that we have legislation moving forward to cut contributions to Social Security and drive the trust fund into the red, I think opposition would be fairly overwhelming.

Everybody gets to put their own spin on things, and this has become a common Republican meme over the past week or two. Unfortunately, it's just factually false. Normally, a reduction in the payroll tax would indeed reduce contributions to the Social Security trust fund, but last year's bill specifically made up for this loss from the general fund. The trust fund got every penny it normally would have, and all the proposals on the table this year do the same.

What changes here isn't the solvency of the trust fund. What changes is where the money comes from. Payroll taxes mainly come from the middle and working classes. The general fund is supported by income taxes, which mainly come from the well-off and the rich. So, generally speaking, a payroll tax cut that's compensated for by transfers from the general fund reduces the taxes of the middle and working classes and raises the taxes of the well-off and the rich.

If Republicans object to this — and they do — they should say so. But it's long past time to stop pretending that this has anything to do with the trust fund, and long past time for the media to stop passing along this claim unchallenged.

Doctors in America

Aaron Carroll thinks that retail health clinics fill a useful niche. "There are times when you need to see a health care professional early in the morning, or later at night," he says. "Have you tried to get an appointment lately when you’re sick? It’s hard!" The chart on the right, which has made an appearance before on this blog, tells the story. Upwards of 20% of people who are sick have to wait a week to get an appointment to see a doctor. Matt Yglesias comments:

A lot of health care professionals in the United States seem to me to be slightly in denial about the level of service they're providing. Somehow we have the most expensive health care system in the world, with the highest paid doctors, and yet it's strangely difficult to actually get an appointment to see one.

My guess is that they're not in denial at all. The reason it takes a long time to see a doctor is because they're booked solid with appointments. They see 20 or 30 patients a day, every day, so most of them really have no particular incentive to make it any easier to make an appointment. Why would they when they're already working at capacity?

And why are they working at capacity? Part of the reason is that we just don't have all that many doctors in America:

These two charts are surprisingly uncorrelated, which presumably has something to do with how healthcare is run in various countries and something to do with cultural mores about how often we like to see doctors. Still, the overall picture is clear: we have relatively few doctors, they're all really busy, and they get paid a lot more than in other countries. That may not be so hot from a patient's point of view, but from a doctor's standpoint, what's not to like?

Liberals and Fraud

The Obama administration has announced plans to crack down on food stamp fraud among both retailers and users. Atrios comments:

Cracking down on thieving retailers is of course a good idea, but, really? Going after SNAP beneficiaries who try to convert their meager benefits to an even more meager amount of cash? I imagine some people who do this are using the money for Things We Officially Frown Upon, but some are probably trying to pay their damn bills.

My guess is that this crackdown is hardly a huge program, so it's not as if loads of resources are being diverted to make life more difficult for the poor. Beyond that, though, Obama seems to instinctively get something that the rest of us lefties probably ought to appreciate more: like it or not, if you want the public to support government programs, you need to make sure they're administered effectively. That's doubly or triply true of social welfare programs, which are easily demagogued even in the best of times. If anything, liberals who support these programs ought to be more concerned about rooting out fraud and improving efficiency than conservatives, who'd be just as happy to see them simply go away.

This is fundamentally a Charlie Peters-ish neoliberal insight, and neoliberalism has obviously taken a lot of lumps over the past decade. Some of them were deserved, some weren't. Either way, this particular insight is one worth holding onto.

When Darrell Issa took over the Oversight and Government Reform Committee, everyone expected a tsunami of scandal investigations. But it hasn't really happened. Why? Jonathan Bernstein says it might be because Obama just runs a really clean shop, but he doesn't find that convincing. Or maybe Issa is just incompetent. But that's not very convincing either. That leaves this:

Totally, totally, speculative, but here goes. Perhaps the reason that the House isn't manufacturing scandals is because the changed media environment has changed the incentives. In the old days, opposite-party Congresses had to work hard to manufacture scandals good enough to get the neutral press to notice. Now, why bother? Most partisans, and especially the primary voters that Members of Congress are increasingly most worried about, get most of their news from the partisan press, and they don't need any Congressional stamp of authority to consider something a legitimate scandal worthy of devoting hours of programming to.

Maybe! But there's another possible explanation: maybe Dave Weigel was right all along. It's true that Issa promised lots and lots of investigations ("I want seven hearings a week, times 40 weeks"), but there was also this:

“As Clint Eastwood says, a man needs to know his limitations,” Issa said....While he promises an ambitious — and some say confrontational — agenda, Issa is making overtures to the Obama administration: He already has a meeting scheduled with Vice President Joe Biden to discuss stimulus oversight.

....Issa is also pointedly looking to avoid probing what he seems to view as peripheral issues — like Waxman and former Chairman Tom Davis’s foray into hearings on steroids in baseball. “This is important, in contrast to hearings on steroids in baseball, where I felt that it was inherently wrong to get Roger Clemens to lie to Congress,” Issa said. “The American people really want us to shrink government.”

Issa also wants to avoid the sometimes petty controversies that enmeshed Rep. Dan Burton (R-Ind.) as committee chairman during the Clinton presidency and sometimes made him the issue.

It pains me to say anything nice about Issa, the man who bequeathed us Arnold Schwarzenegger, but maybe he takes this stuff more seriously than his critics ever gave him credit for. Obviously he's going to focus his attention on conservative causes and he's going to focus his oversight on the Obama administration — both perfectly reasonable things to do — but perhaps he was sincere about avoiding petty nonsense. Stranger things have happened.

In the LA Times today, Spike Dolomite Ward lays out Barack Obama's essential political problem for all the world to see. The recession hit her family hard, she lost her health insurance, and then she got cancer:

Fortunately for me, I've been saved by the federal government's Pre-existing Condition Insurance Plan, something I had never heard of before needing it. It's part of President Obama's healthcare plan, one of the things that has already kicked in, and it guarantees access to insurance for U.S. citizens with preexisting conditions who have been uninsured for at least six months.

…Which brings me to my apology. I was pretty mad at Obama before I learned about this new insurance plan. I had changed my registration from Democrat to Independent, and I had blacked out the top of the "h" on my Obama bumper sticker, so that it read, "Got nope" instead of "got hope." I felt like he had let down the struggling middle class. My son and I had campaigned for him, but since he took office, we felt he had let us down.

So this is my public apology. I'm sorry I didn't do enough of my own research to find out what promises the president has made good on. I'm sorry I didn't realize that he really has stood up for me and my family, and for so many others like us. I'm getting a new bumper sticker to cover the one that says "Got nope." It will say "ObamaCares."

And there you have it: Obama's core problem with his supporters from 2008, the ones who listened to his soaring rhetoric and believed he really was going to transform Washington—and have since been bitterly disappointed. This has always been something I could understand only intellectually, since I never for a second paid any attention to his stump speeches. Of course they soared! Of course they promised a new era! That's what politicians always promise. Why on earth would anyone take this seriously, when every single other piece of evidence showed him to be a cautious, pragmatic, mainsteam, center-left Democratic candidate?

Beats me. But lots of people did take it seriously, and now Obama is stuck trying to convince them in very practical, non-soaring terms that he really has done a lot for them. That list is pretty long and includes a big stimulus bill, a landmark healthcare reform bill, student loan reform, an end to the Bush torture regime, the Lily Ledbetter Fair Pay Act, a hate crimes bill, a successful rescue of the American car industry, resuscitation of the NLRB, passage of New START, the death of Osama bin Laden, withdrawal from Iraq, a decent start on rationalizing Pentagon procurement, repeal of DADT, credit card reforms, unprecedented gas mileage improvements, a second stimulus in 2010, and passage of financial reform legislation.

Were there disappointments too? Sure. Obama badly mishandled cap-and-trade, has a weak record on civil liberties, escalated the war in Afghanistan, has been unaccountably sluggish on appointments, treated the financial industry too gingerly, and failed to seriously address underwater mortgages, among other things.

But that's to be expected. This is the real world, not utopia, and Obama is a cautious, pragmatic, mainsteam, center-left Democratic president. So how do you win back the people who believed the soaring rhetoric and either don't know or don't care about Obama's impressively long list of concrete achievements? It's his essential dilemma. Maybe Spike Dolomite Ward can give him some suggestions.

The Washington Post reports today that Barack Obama has received donations from 30 billionaires while Mitt Romney has received donations from 42 billionaires. Ho hum. But there's this fascinating little tidbit halfway through the story:

Romney has attracted the support of Redskins owner Dan Snyder and other billionaires, including California real estate developer Donald Bren, who is worth $12 billion, and developer and publisher Sam Zell, who is worth $5 billion.

As a lifelong reader of the Los Angeles Times, I'd say that the support of Sam Zell ought to be reason enough to disqualify anyone from the presidency. I suppose there's a good chance that he's not actually much more of an asshole than hundreds of other billionaires, but he sure went out of his way to make it more obvious than usual. He's just lucky that LA also has Frank McCourt around, which means there's at least one zillionaire here that we all hate even more.

A few days ago Tyler Cowen kicked off a discussion of whether or not Germany (and the core European countries in general) have acted more virtuously than Greece (and the periphery countries in general) during the decade since the euro was introduced. It was unclear how much he was simply presenting a debating case vs. how much he actually believed his own arguments, and in that spirit I want to present a different case. This one is about how Europe got where it is today and who deserves a bigger share of the blame for its current mess. I'm not suggesting this is the only way to look at things, or even necessarily the best way, but I do think it's an instructive way. So here it is in seven easy steps.

1. The introduction of the euro made cross-border capital flows far more frictionless. As a result, money began flowing from the sluggish economies of the core countries (mostly Germany, but also France, Benelux, and others) to the more capital-starved economies of the periphery. You can tell two basic stories about why this happened:

a) A "push" story: Investors chasing higher yields actively pushed money into the more vibrant economies of the periphery.

b) A "pull" story: Profligate national governments, addicted to living beyond their means, pulled money into the periphery via heavy borrowing, which crowded out private borrowing.

Most likely, both of these were part of what happened and both reinforced each other. But generally speaking, if the pull story were true you'd expect to see increases in nominal interest rates in the periphery. As the table above shows, that's not what happened, which means the push story is more likely to be the primary explanation. The primal sin here is that for years supposedly sophisticated investors in the core shoveled money into the periphery with abandon, ignoring the obvious risks of doing so.

2. Normally, capital flows would eventually be moderated by changes in exchange rates, but this was impossible for the periphery since they no longer had their own currencies. The result was persistent hot money flows into a fixed exchange rate area and steadily higher inflation in the periphery compared to the core. This state of affairs is widely known to be unsustainable and eventually disastrous, but it was something Germany happily ignored since it provided German savers with a place to invest their money and provided the periphery with enough cheap capital to act as a thriving market for German exports.

3. High inflation in the periphery would normally be moderated by tighter monetary policy. Again, though, this was impossible for the periphery because they didn't control their own monetary policy. The chart on the right shows actual ECB monetary policy during the aughts (red line): it was kept loose in order to keep Germany's sluggish economy growing, but this meant that monetary policy was way too loose for the periphery. The overheated economies of the periphery thus overheated even more. This was largely the fault of the core, which controlled monetary policy, not the periphery. It was Germany that needed loose monetary policy, not Greece.

4. Capital inflows produce a capital account surplus, and the flip side of a capital account surplus is a current account deficit. This is an accounting identity, not a matter of morality or recklessness. And current account deficits always produce either matching government debt (i.e., budget deficits) or matching private debt (i.e., low private savings). This is also an accounting identity, not a matter of morality or recklessness.

So all the current account deficit countries inevitably got one or the other or both. In the event, Ireland and Spain got a property bubble; Greece and Portugal ran up sizeable budget deficits. We know from painful experience that capital flows like this are unsustainable in the long run, but they can go on for quite a while until something happens to scare everyone into calling a halt and producing a sudden crisis. The 2008 financial crisis was "something."

5. There's another side to this too: banks intermediate current account deficits. This is inevitable, hydraulic. A banking system in a current account deficit country always features a high loan-to-deposit ratio, which means that banks in the periphery became dependent on skittish wholesale funding instead of more durable retail deposits. As with capital inflows, when investors suddenly decide to stop the music, wholesale funding dries up and the banking system goes into cardiac arrest.

6. This creates a vicious cycle: The financial crisis produced a recession that cratered both periphery country finances and the periphery's banking system. Budget deficits in the periphery blew out, debt levels became unsustainable, and at the same time investors began a run on their banking systems. As Hyun Song Shin puts it, "The European crisis carries the hallmarks of a classic 'twin crisis' that combines a banking crisis with an asset market decline that amplifies banking distress…In the European crisis of 2011, the twin crisis combines a banking crisis with a sovereign debt crisis, where the mark-to-market amplification of financial distress interacts to worsen the banking crisis."

In other words, as sovereign debt woes got worse, bank woes got worse too. And as bank woes got worse, sovereign debt woes got worse.

7. The damage wasn't limited to the periphery. All those capital inflows came from the core, and when the music stopped and the periphery was left in shambles, banks that had loaned out all the money were suddenly in trouble too. As an example, the chart on the right shows bank exposure to debt from Spain. German and French banks alone have over $300 billion in exposure to Spanish debt, so if Spain goes kablooey, so do they. And that brings us to the present day.

If you've read this far, let me make it clear that nothing here is meant to absolve the periphery countries from their part in this. Ireland fed the fire of its property bubble irresponsibly, Greece lied about its finances, and throughout southern Europe there was a persistent refusal to reform their labor practices, improve productivity, and live within their means. The core countries have every right to hold the periphery accountable for this.

At the same time, this is fundamentally a story of economics, not morality, and it's only in Step 1 above that the periphery countries bear even a share of the blame for what happened. The rest was either caused by deliberate core policies or else the inevitable result of those policies. Whether Germany likes to hear it or not, it's simply a fact that both sides allowed—even encouraged—capital flows to remain imbalanced for far too long. The periphery enjoyed access to cheap money and the core liked having a thriving market for its exports. The core and the periphery both rode this wave up, and now they're both going to have to ride it down.

It's also an unfortunate fact that no one handles hot money flows well, something that's doubly true in a fixed exchange rate area. Germany was no better at identifying this and doing something about it than Greece was, and they're no happier about giving up their export-driven economy than Greece is about giving up its import-driven economy.

What does all this mean going forward? I guess I'd say a few things:

  • Germany is justified in demanding reforms from the periphery as the price of a bailout. Partly this is just because creditors generally have that right. But it's also for practical reasons. Even if you feel that reckless lenders are morally equivalent to reckless borrowers, it's still the case that if Germany simply bails out the periphery without anything changing, they're essentially committing themselves to subsidizing the periphery forever. That's not something any country will (or should) feel obliged to do.
  • At the same time, forced austerity for its own sake is foolish. Demanding reforms that promote long-term growth is fine. Demanding austerity that will make periphery economies even worse off in the short term is counterproductive for everyone, including Germany.
  • It's probably also wrongheaded to focus so heavily on budget deficits, no matter how virtuous it seems to insist on balanced budgets. That's not what caused the eurozone's problems: Spain and Ireland ran budget surpluses during the aughts and only went into deficit after the financial crisis cratered their economies. Europe's fundamental problem wasn't budget deficits, it was capital flows within the eurozone—or, put a different way, the problem was persistent current account imbalances in a fixed exchange rate area. It was the countries with current account deficits that consistently ran into trouble, and any reforms worth doing need to address that directly. That requires changes from both the core and periphery. After all, every country can't run a budget surplus at the same time, just as capital can't flow into every country at once.
  • A non-eurozone country that ended up in the trouble the European periphery is in would most likely declare bankruptcy: They'd "restructure" their debt, meaning that banks and others who held their bonds would lose all or some of their money. The EU's leaders, however, appear to consider this unacceptable for a member of the eurozone. Unfortunately, as Felix Salmon says today, this is probably a mistake. Even if you feel that reckless borrowers are more blameworthy than reckless lenders when a crisis hits, surely lenders should retain some incentive to make sure their loans are properly vetted. A promise from the EU to always keep sovereign bondholders whole sends a message to banks that reckless lending carries no penalty at all. That's a recipe for a repeat of 2008.

As a side note, it's worth pointing out that Italy is sort of a special case here. (That's why I didn't include them in the charts above.) Their economy has been in the doldrums for over a decade, and that's something they need to address. At the same time, they were a middle-of-the-pack country on a wide variety of economic measures all through the aughts: they ran only modest current account deficits and modest budget deficits; their inflation rate was only a bit higher than Germany's; and their debt-to-GDP ratio actually declined. Their problem isn't so much that their fundamental economic position is disastrous, it's that (a) their economic position was weak and the recession made it weaker, and (b) they're much larger than any of the other periphery countries. They're ground zero of the crisis right now simply because investors have lost confidence in them, but they don't really belong in the same basket as the four other periphery countries.